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Why paying “market rate” doesn’t work

By June 11, 2021No Comments

About 4 years ago, I bought a house in Auckland. I’m not really a savings kinda guy, so didn’t have a 20% deposit. Contrary to popular belief, this is possible, but the bank will only lend you up to the amount of a registered valuation of the property. I’m also not a registered valuation kinda guy, so I bought the house anyway and then had a very uncomfortable few days. My rationale was that surely there is no better valuation of a property than what it sells for at public auction. Westpac disagree, and instead prefer a nice South African chap with a tape measure to tell them what a house would sell for at auction, above what the house sold for at auction the day before. Such is the world we live in.

Why mention this you may ask? Well, firstly, I always start the blog with stupid shit like this, but more importantly, my conversations with the good folk at Westpac have been echoing with my client base this week. Across both our businesses, there has been a ground-swell of clients who are struggling to hire staff, even though they insist that they are paying “market rate”. However, now more than ever, I’ve noticed a widening gulf on what my clients are prepared to pay at market rate and what (good) candidates will accept. In my opinion (or as the kids say, IMHO), a lot of this stems from both our inability to understand what market rate means, and where the market is currently sitting. And when we do understand both these things, we’re so arrogant that we think we can always attract a better than market rate candidate at market rate prices.

Firstly, the market is…well, a market. Tell me the value of your house from 12 months ago? Or what about the value of an avocado 6 months ago? Or a crypto currency 3 months ago? Or the price of a pint of bull’s semen 1 month ago (asking for a friend)? You’d rightly say that the values you give are historic and not market rate. Indeed, almost everything with “market” in its title has a fluctuating cost of product or service. It’s what market means, and it’s typically decided by the supply of the product or service, and the number of people who want it. Right now for example, there are hardly any immediately available Internal Recruiters out there. There is a big need for immediately available Internal Recruiters. Now what do you think is happening to the cost of Internal Recruiters currently? And yet, when I highlight this to my clients, half of them threaten to call another recruiter who might tell them better, yet incorrect, news. I’d hate to be their postman when he or she delivers a speeding fine…

Even if we do understand the concept of market rate, it’s harder than ever to pinpoint, and yet we continue to make hiring decisions based on it. Even more so than the GFC, we are operating in a new reality. At least the GFC fucked us and we all knew we were getting fucked. Covid killed our economy, but then we lead the world in our response and recovery. Some sectors are suffering, but most aren’t. The new unemployed don’t come close to addressing the talent shortage caused by the border closure. Things were shit, but better than most. We don’t know if we’re coming or going and your poor rem&bens specialist’s spreadsheet can’t keep up. And we’re still trying to make decisions based on this foggy data.

Hiring Managers are also operating under the mistaken belief that their own salary has a bearing on “market rate”. “That’s only 5k less than me!” they gasp. Or “Maybe I should go contracting haha (sad, fake laugh)”. The chances are, they took the job 3 years ago, and a fair bit has happened since then. Getting paid too little yourself  shouldn’t stop you hiring someone. It should prompt you to ask for a pay rise. The lowest salary you can offer to someone who can do the job to the level you require is the new market rate. What does your salary have to do with that?

Speaking with an internal recruiter mate in the pub last night about this, I think we nutted out a solution. Firstly, accept that if it’s taking 4 months to fill a role, you probably need to pay more. And by paying more, I mean actually costing less, as you don’t have a vacancy for a third of the fucking year. Secondly, don’t assume that everyone loves the brand and culture as much as you do in the exec team. Telling your internal recruiter or agency supplier that people should want to work here due to the culture is arrogant nonsense. $5k on a basic salary is neither here nor there to someone on $190k. For people on a low wage, an extra dollar an hour means they can treat their family to fish & chips on Saturday night – and that’s a big deal. Some people see a job as a job, and we need these people. Thirdly, if you want a business that performs above the rest of the market, create a great culture, treat people well…..and pay above market rate.

Have a good weekend folks.